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Resources

Overview

The Importance of Understanding Money Creation

  • Money makes the world go round, but people rarely think about where it comes from. 
  • Money creation is an awesome power which largely flies under the radar of public awareness.
  • When money creation happens in obscurity, it is diverted to private interests, in the form of military budgets, tax cuts for corporations and the wealthy, corporate or bank bailouts, and for-profit bank loans with little public interest justification.
  • We must shine a light on the public power of money creation in order to hold this awesome power accountable to democracy.

The Problem With The Way We Currently Think About Money

  • To the extent that we are aware of money creation, most people think of it as something which occurs at the central bank, entirely separate from public spending. 
  • This contributes to our understanding of money creation as a rare and taboo occurrence, which threatens to abruptly unleash hyperinflation.
  • When we think of money creation as only occurring at an independent central bank, we think of the federal government as a currency user rather than a currency issuer. As a result we see taxes or borrowing as necessary to fund spending.
  • We also think of banks as merely lending out already existing money that depositors entrust to them.
  • These inaccurate accounts of how our economy works effectively erase the essential realities of money creation from our understanding of the economy.

The Reality of Money Creation

  • Money creation is a routine part of the functioning of our economy and is rarely inflationary.
  • Both federal spending and bank lending are forms of money creation.
  • Money creation is a power that relies heavily on public support and is therefore essentially public in nature. Accordingly, money that is created in our economy is “our money.”

Public Spending Vs

Private Lending

 

  • Money is an accounting system, a form of public infrastructure which facilitates economic activity much the way roads and bridges facilitate transportation. The question of public spending vs. private lending is one of how this infrastructure is introduced into circulation to be used by the public.
  • Private lending often goes to uses with little public interest justification, it is interest-bearing, and it must be paid back. Once paid back, it is no longer in circulation. 
  • Public spending is explicitly public and is at least meant to go to public interest uses. Once it is spent into circulation it can circulate indefinitely, or until it is taxed back (which is far less burdensome than having to fully pay back loan principal, plus interest). 
  • Whereas private lending promotes a build up of private debt which can lead to financial crisis, public spending makes it easier for private borrowers to pay down their debts, thereby stabilizing the economy.
  • Money creation through public spending allows the public to be independent of private finance, wealthy taxpayers, and for-profit substitutes for basic public services.

The Opportunity Presented by Changing The Way We Think About Money

  • Changing the way we think about money reveals immense untapped public power which holds the potential to strengthen our ability to deliver widely shared prosperity and general human flourishing. 
  • To unlock this potential we need only assert control over something which is already ours – our public power of money creation. 
  • In changing the way we think about money we are called upon to do nothing less than re-imagine what we are capable of achieving together as a society. 
  • Instead of assessing a spending proposal’s impact on the budget, we must learn to assess it’s likely impact on price stability, and deploy measures to mitigate inflation when necessary.

By asserting our public say over how banks allocate what are effectively public funds when they create money through lending, we can both promote the flow of credit to public interest uses, as well as curtail the overall allocation of public funds by the banks. Curtailing the private allocation of public funds could be used as a check on inflation if it ever does become a problem as a result of increased public spending.